The SC in its recent landmark judgement on November 15, 2019, in COC of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Ors, has stemmed from the fact that since the introduction of Section 29A into the IBC on the 23rd November 2017, resolution applicant were ineligible to submit their resolution plans. Section 29A prescribes several criteria which disqualify resolution applicants, persons acting in concert or jointly with resolution applicants or persons connected with them.

The term connected persons has defined in Section 29A cover a lot of persons such as those who promote, control, and manage the resolution applicants. Inter alia, section 29A rendered resolution applicants ineligible if they have an account or they have an account of a CD which falls under their control and the account has been classified as a non- performing asset in line with relevant guidelines issued by the RBI and a period of one year has elapsed from the date the account was classified as an NPA .

Key Highlights And Analysis Of Supreme Court’s Decision:

1. Role of Resolution Professionl (RP):

   RP is a person who not only manage the affairs of the CD as a going concern from the stage of admission of an application under Sections 7, 9 or 10 of the Code till a resolution plan is approved by the AA but also a key person who is to appoint and convene meetings of the COC, so that they may decide upon resolution plans that are submitted following the detailed information given to resolution applicants by the RP. As per SC judgement, “Another very important function of the RP is to collect, collate and finally admit claims of all creditors, which must then be examined for payment, in full or in part or not at all, by the resolution applicant and be finally negotiated and decided by the COC.
    

2. Role of the prospective resolution applicant:

   The PRA has a right to receive complete information as to the CD, debts owed by it, and its activities as a going concern, before the admission of an application under section 7, 9 or 10 of the Code. For this purpose, he has a right to receive the information contained in the information memorandum as well as the evaluation matrix mentioned in Regulation 36-B
    

3. Role of the Committee of Creditors (COC):

   The SC reinforced that the CoC are the key decision-makers in the rehabilitation of CD. It observed that the commercial wisdom of the CoC in accepting a resolution plan by a majority must drive decisions including the distribution of proceeds under a resolution plan . The SC observed that such an analysis is required to take into account “all the aspects of the resolution plan, including the manner of distribution of funds among various classes of creditors”.
   
   In this regard, the CoC is free to suggest a modification to the commercial proposal and it may approve a resolution plan by a vote of not less than 66% of the voting share of the FC after considering the 'feasibility and viability' of such resolution plan and other requirements.
    

4. Constitution of a sub-committee by COC:

   Sub-committees cannot be constituted for:
   
   • Exercising of the COC powers on questions which have a vital bearing on the running of the business of the CD.
   • Approving a resolution plan.
     However, sub-committees can be appointed to negotiate with resolution applicants, or to perform other ministerial or administrative acts, provided such acts are in the ultimate analysis approved and ratified by the COC
      

5. Jurisdiction of NCLT and NCLAT:

   The AA generally cannot interfere on merits with the commercial decision taken by the COC. However, the limited judicial review available is to see that the COC has taken into account the fact that the CD needs to keep as a going concern during the CIRP ; that it needs to maximise the value of its assets; and that the interests of all stakeholders including OC.
   
   If the AA finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the COC to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the COC while approving a resolution plan may thus be looked at by the AA only from this point of view, and once it is satisfied that the COC has paid attention to these key features, it must then pass the resolution plan, other things being equal.
    

6. Scope of Judicial Review of the NCLT/NCLAT:

   The SC held that the NCLT has limited powers of judicial review on the business decisions of the majority of the CoC, which are guided by Section 30(2) of the Code which requires a RP to examine each resolution plan to ensure that it provides for certain specified matters such as payment of CIRP costs, payment of debts of OC, etc.
   
   Concerning the NCLAT, it held that such review must be within the parameters of Section 32 read with Section 61(3) of the Code, which provides that an appeal from an order approving a resolution plan can be filed because the resolution plan is in contravention of the law, has a material irregularity or does not provide for debts owed by OC.
   
   The SC has clarified that the NCLT and the NCLAT have not been endowed with the jurisdiction to act as a court of equity or exercise plenary powers. It also stressed that while the ultimate discretion of what to pay and how much to pay each class or subclass of creditors lies with the CoC, the decision of the CoC must necessarily reflect that it has considered three main parameters:
   
   1. ensuring that the CD is kept as a going concern during the CIRP process;
   2. maximising the value of the assets of the CD; and
   3. balancing the interests of all the stakeholders, including OC.
      
      The NCLT and the NCLAT cannot interfere on merits with the commercial decisions taken by the CoC. The CoC retains the ultimate discretion in determining what to pay and how much to pay each class or sub-class of creditors.
       

7. Secured and unsecured creditors; the equality principle:

   Financial Creditors are in the business of lending money who are capital providers for companies, who in turn can purchase assets and provide working capital to enable such companies to run their business operation.
   
   Whereas Operational Creditors are beneficiaries of amounts lent by FC which are then used as working capital, and often get paid for goods and services provided by them to the CD, out of such working capital.
   Hence, “If an “equality for all” approach recognising the rights of different classes of creditors as part of an CIRP is adopted, secured FC will, in many cases, be incentivised to vote for liquidation rather than resolution, as they would have better rights if the CD was to be liquidated rather than a resolution plan be approved.” This would defeat the entire objective of the Code which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.
    

8. The utilisation profits of the CD during the Corporate Insolvency Resolution Process:

   The request for proposal for the resolution plan issued in terms of the Code and consented to by ArcelorMittal and the CoC provided that the distribution of profits made during the CIRP would not go towards the payment of the creditors. The NCLAT, however, directed that the profits of the CD during the CIRP be distributed among all financial and OC on a pro-rata basis of their claims, provided that such amount did not exceed the admitted account of their claims.
   
   The SC set aside this direction and held that as per the RFP, the distribution of profits made during the CIRP could not be applied towards the payment of a debt of any of the creditors.
    
9. The constitutional validity of Sections 4 and 6 of the IBC (Amendment) Act, 2019:
   

   Section 4:

   So far as Section 4 is concerned, it is clear that the original timelines under Section 12 of the Code in which a CIRP must be completed have now been extended to 330 days, which is 60 days more than 180 plus 90 days. The Court, hence, while leaving the provision otherwise intact, struck down the word “mandatorily” as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution.
   
   The effect of this declaration is that ordinarily the time taken concerning the corporate resolution process of the CD must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. It was, however, explained that on the facts of a given case, if it can be shown to the AA and/or Appellate Tribunal under the Code that only a short period is left for the completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the CD is put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the AA and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the AA and/or the Appellate Tribunal itself, it may be open in such cases for the AA and/or Appellate Tribunal to extend the time beyond 330 days .
   
   

   Section 6:

   Section 30(2)(b) of the Code as substituted by Section 6 of the Amending Act is, in fact, a beneficial provision in favour of OC and dissentient FC as they are now to be paid a certain minimum amount, the minimum in the case of OC being the higher of the two figures calculated under sub-clauses (i) and (ii) of clause (b), and the minimum in the case of dissentient financial creditor being a minimum amount that was not earlier payable. Pre- amendment, secured FC may cramdown unsecured FC who are dissentient, the majority vote of 66% voting to give them nothing or next to nothing for their dues. In the earlier regime, it may have been possible to have done this but after the amendment, such FC are now to be paid the minimum amount mentioned in sub-section (2). It was also noticed that the discretion is given to the COC by the word “may” again makes it clear that this is only a guideline which is set out by this sub-section which may be applied by the COC in arriving at a business decision as to acceptance or rejection of a resolution plan.
    

10. Liability of guarantors:

    The NCLAT had extinguished the rights of creditors against guarantees that were extended by the promoter/promoter group of the CD. The NCLAT held that once the guaranteed debt stood cleared according to the approval of the resolution plan providing for payment to the lenders, the deed of guarantee would no longer be effective.
     

The SC set aside this finding of the NCLAT on grounds that Section 31(1) of the Code provides that once a resolution plan is approved by the CoC, it shall be binding on all stakeholders, including the guarantors. The resolution plan would therefore limit the guarantor's right of subrogation towards the creditor. The guarantee constitutes an independent obligation that the guarantor has undertaken.

Therefore, even where the debt of the CD is satisfied under the resolution plan, the lenders can pursue the guarantor for the recovery of their remaining claim amount. The SC has stated that the resolution plan is approved by the CoC, in this case, does not affect pending litigations on account of invocation of personal guarantees .

Conclusion
With the SC giving a go-ahead to the sale of Essar Steel, it is expected that banks will recover over 90% of their dues worth over INR 40,000 crore that the company owes them. OC are estimated to receive close to INR 1,200 crore.

This should help improve the financial position of weak public sector banks and bolster profitability given that the dues owed by Essar Steel were fully written off by almost all lenders . Unless a review is preferred by the OC against this landmark judgement of the SC, this judgement should put to rest key questions concerning the treatment of operational and FC as well as the role of the CoC, the NCLT and the NCLAT in the CIRP of a CD under the Code. The SC has correctly recognised the difference between secured and unsecured creditors which is essential for the banking industry. Additionally, due recognition has been given to the commercial wisdom of the lenders by reinstating the CoC to be the primary decision-maker.

It is expected that this ruling of the SC will result in large-scale disposal of pending appeals before NCLAT and disposals at NCLT on similar questions of law. Recent news reports have however indicated that the government is considering revising the framework of distribution of proceeds to FC and OC under the Code on account of protracted litigations (in multiple cases) based on challenges from OC . These litigations have led to delays in completion of the process and distribution of proceeds to creditors. It remains to be seen whether the government will treat this decision as to the final settled position in this regard.

References:

• https://www.trilegal.com/index.php/publications/analysis/essar-steel-judgment-key-highlights
• Essar Steel verdict - INSIGHTSIAS
• https://nualslawjournal.com/2020/01/14/essar-steel-judgement-as-promising-as-it-seems/
• https://corporate.cyrilamarchandblogs.com/2019/11/essar-steel-india-limited-supreme-court-reinforces- primacy-of-creditors-committee-insolvency-resolution/#_ftn3
• https://www.trilegal.com/index.php/publications/analysis/essar-steel-judgment-key-highlights
• https://www.ibbi.gov.in/uploads/order/d46a64719856fa6a2805d731a0edaaa7.pdfhttps://www.trilegal.com/index.php/publications/analysis/essar-steel-judgment-key-ighlights https://nualslawjournal.com/2020/01/14/essar-steel-judgement-as-promising-as-it-seems/
• https://www.trilegal.com/index.php/publications/analysis/essar-steel-judgment-key-highlights